Bond vigilantes
October 4, 2023
–We’re getting a change in leadership, no I’m not referring to McCarthy’s ouster as House Speaker, but in the rise of the long bond yield. And it’s not ‘leadership’ in a good way, which is an omen for our political class. The thirty yr yield soared 14.5 bps to 4.939% while the two-yr rose only 4.4 bps to 5.15%. A realtor friend (thanks RR) told me yesterday that Proper Rate had quoted him 8.125% on a 30y fixed mortgage. As the attached chart shows, US vol is approaching the panic high of March. TLT (long bond ETF) has exploded in volume on new lows in price.
–Almost all SOFR calendar spreads made new highs. SOFR pack changes: Whites -0.75, reds -5.625, greens -10.75, blues -12.75 and golds -13.0. For the first time since May (in the aftermath of the regional banking eruption) the red pack to gold pack closed postive. However, in May the packs were just above a 3% yield as the market perceived a robust Fed put which would lead to rapid rate cuts. Currently the red pack (2nd year forward) settled 95.58875 and the gold pack (5th year) settled 95.57875, so both around 4.4%, about 100 bps lower than the current Fed Effective rate of 5.33%. New highs in 2/10 treasury spd at -34.5 and 5/30 at +13.6.
–$/yen pulled back sharply from 150 yesterday on suspected intervention, but FT reports that Japan spent $12.7b today buying JGB’s to cap yields that have jumped to the highest in a decade. 10y JGB above 80 bps. JPY went as low as 147.43 yesterday but is now back above 149.
–The question now is what stops it. Markets have started Q4 by becoming increasingly untethered. As a small example, HYG (hi yield ETF) was down 1% yesterday and closed at a new low for the year. VIX is around 20, though in March it ticked to 30. It’s at times like this when the two words ‘counterparty risk’ start to pop up more frequently. At the end of 2018 it was the Fed pivot that turned things around. But how is the Fed going to address wealth disparity and climate change without making everyone poor? Just joking of course…
–Payrolls tomorrow as Kaiser Permanente faces a strike by 75000 employees.
